In an era of rising interest rates and tightening lending standards, many small business owners are wondering how they can access the capital they need as they eye growth opportunities. According to the Biz2Credit Small Business Lending Index, small-business loan approval rates from large banks fell in March 2023 to the lowest percentage since July 2021, landing at 13.8%.
Fortunately there are others options beyond the traditional business loan, and now’s the time for small businesses to explore additional financial vehicles. Here’s what you need to know about accessing capital to foster growth and success.
Why might I need financing?
If you’ve never considered financing for your small business, you might be surprised at all the ways it can bolster your operations. The extra funds can help you shore up your finances in case of a prolonged dip or customer cutbacks, or can be used to help you grow.
In addition to providing a flow of working capital, other common reasons a small business might seek financing include: expanding inventory, purchasing equipment or real estate, boosting marketing, hiring additional talent or expanding locations or product offerings, to name a few.
What are some financing options to consider?
Many small businesses are unaware of the many available alternatives, often turning to personal funds to cover these necessary expenses. However, choosing a business-specific financing tool allows you to separate your personal and business expenses, which makes it easier come tax time and also may provide some legal protection.
Here are three business financing options to investigate:
1. Business line of credit
A line of credit is a flexible, short-term loan you can tap as needed, which means you’re only paying interest on the amount used at any particular time, rather than on an entire lump sum. That makes it ideal for short-term cash flow gaps or unexpected expenses. Typically you won’t need collateral to secure this type of loan, which means you can qualify relatively easily.
2. Small Business Administration (SBA) Loan
SBA loans are granted by financial institutions like Valley Bank, and guaranteed by the SBA. Because the bank has a lower liability, SBA loans offer more favorable terms, such as lower down payments and better repayment terms, than most conventional business loans. Since you will receive a fixed pool of money, an SBA loan is a good choice when you need a specific amount of money for a major expenditure.
3. Business credit card
A business credit card is much like the credit card you use for your own personal expenses, but can offer additional benefits. For example, it may allow you to earn rewards, such as Valley’s Visa® Business Credit Card which offers 1% unlimited cash back. That particular card also allows you to issue up to 25 cards under one account at no charge, which makes it simple to track your employees’ purchases. A credit card can be a wise choice for financing if you don’t have sufficient cash flow or collateral to qualify for a loan.
What should I know before I apply for a loan or line of credit?
With the uncertain economy, some banks might have tightened their lending standards. That’s why you should consider seeking funding before you need it imminently, as your request may take a while to process. Having a business banker you can rely on will help ease the process; when you have already established a relationship, they better understand the potential of your business and can offer guidance on best practices to secure loan approval.
The goal is to create a compelling package that puts your best foot forward. Your business banker can help steer you toward what you need, but in general, you’ll want to:
- Develop a solid business plan to help the banker understand your vision.
- Assemble financial documents, such as bank statements, tax returns, proof of revenue and cash flow and more.
- Provide solid credit scores for both business and personal credit. Some banks may rely on a personal credit score if your business lacks a sufficient business credit profile.
How do I start exploring my options?
Once you’ve determined what you need a loan for – or if you just want to line up financing in advance in case of the unexpected – you’ll want to find a business banker who can walk you through the pros and cons of these various vehicles to determine the one that’s right for you.
A financial partner like Valley Bank that’s committed to providing financing for small businesses can be your ally as you evaluate the alternatives. Contact a Valley business banker today to find out how we can help your business grow.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. All loans products are subject to credit approval. Additional terms and conditions apply. You should consult our personal tax, legal and accounting advisors for advice before engaging in any transaction.